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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Quarterly Period Ended Commission File
March 31, 2003 1-08019-01
PFGI CAPITAL CORPORATION
Incorporated Under IRS Employer I.D.
The Laws of Maryland No. 04-3659419
One East Fourth Street, Cincinnati, Ohio 45202
Phone: 513-579-2000
Indicate by check whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [ ] No [X]
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date.
Common Stock, $.01 Par Value = 5,940,000
Series A Preferred Stock, $25.00 Stated Value = 6,600,000
(As of April 30, 2003)
-1-
PFGI CAPITAL CORPORATION
INDEX TO QUARTERLY REPORT
ON FORM 10-Q
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Balance Sheets . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Statement of Income . . . . . . . . . . . . . . . . . . . . . . . . 4
Statement of Changes in Shareholders' Equity . . . . . . . . . . . . 5
Statement of Cash Flows . . . . . . . . . . . . . . . . . . . . . . 6
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS . . . . . . . . 13
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES
ABOUT MARKET RISK . . . . . . . . . . . . . . . . . . . . . . 20
ITEM 4. CONTROLS AND PROCEDURES . . . . . . . . . . . . . . . . . . . 21
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS . . . . . . . . . . . . . . . . . . . . . . 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K . . . . . . . . . . . . . . . 21
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
CERTIFICATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
-2-
PART 1. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
- -----------------------------
PFGI CAPITAL CORPORATION
BALANCE SHEETS
March 31, December 31,
2003 2002
(Dollars In Thousands) (unaudited)
- ---------------------------------------------------------------------------------
ASSETS
Commercial Mortgage Loan Participations $ 324,744 $ 325,005
Reserve for Loan Participation Losses (3,247) (3,250)
--------- ---------
Net Commercial Mortgage Loan Participations 321,497 321,755
Cash and Due From Banks 6,539 5,357
Interest Receivable 1,105 1,107
Accounts Receivable - The Provident Bank 220 279
Other Assets 12 17
--------- ---------
TOTAL ASSETS $ 329,373 $ 328,515
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Other Liabilities $ 8 $ -
Shareholders' Equity:
Series A Preferred Stock, $25 Stated Value,
6,600,000 Shares Authorized, Issued and Outstanding 165,000 165,000
Common Stock, $.01 Par Value, 5,940,000 Shares
Authorized, Issued and Outstanding 59 59
Capital Surplus 159,380 159,380
Retained Earnings 4,926 4,076
--------- ---------
Total Shareholders' Equity 329,365 328,515
--------- ---------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 329,373 $ 328,515
========= =========
See notes to financial statements.
-3-
PFGI CAPITAL CORPORATION
STATEMENT OF INCOME
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(In Thousands, Except Per Share Data)
(Unaudited)
Interest Income:
Interest on Loan Participations $4,233
Interest on Cash Deposit 22
------
Total Interest Income 4,255
Provision for Loan Participation Losses -
------
Net Interest Income After Provision
for Loan Participation Losses 4,255
Noninterest Expense:
Loan Servicing Fees 101
Management Fees 81
Other Noninterest Expense 26
------
208
------
Income Before Income Taxes 4,047
Income Taxes -
------
Net Income / Comprehensive Income $4,047
======
Preferred Stock Dividends $3,197
======
Net Income Available to Common Shares $ 850
======
Per Common Share:
Basic $ 0.14
Diluted $ 0.14
Dividends $ -
See notes to financial statements.
-4-
PFGI CAPITAL CORPORATION
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(In Thousands)
(Unaudited)
Preferred Common Capital Retained
Stock Stock Surplus Earnings Total
- -------------------------------------------------------------------------------------------
Balance at January 1, 2003 $165,000 $ 59 $159,380 $4,076 $328,515
Dividends Paid on Preferred Stock (3,197) (3,197)
Net Income 4,047 4,047
-------- ---- -------- ------ --------
Balance at March 31, 2003 $165,000 $ 59 $159,380 $4,926 $329,365
======== ==== ======== ====== ========
See notes to financial statements.
-5-
PFGI CAPITAL CORPORATION
STATEMENT OF CASH FLOWS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(In Thousands)
(Unaudited)
Operating Activities:
Net Income $ 4,047
Adjustments to Reconcile Net Income to
Net Cash Provided by Operating Activities:
Decrease in Interest Receivable 2
Decrease in Accounts Receivable and Other Assets 64
Increase in Other Liabilities 8
-------
Net Cash Used in Operating Activities 4,121
Investing Activities:
Net Decrease in Loan Participations 258
Financing Activities:
Dividends Paid to Preferred Shareholders (3,197)
-------
Increase in Cash and Cash Equivalents 1,182
Cash at Beginning of Period 5,357
-------
Cash and Cash Equivalents at End of Period $ 6,539
=======
Supplemental Disclosures of Cash Flow Information:
Cash Paid for:
Interest $ -
Income Taxes -
See notes to financial statements.
-6-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
- --------------------
PFGI Capital Corporation (PFGI Capital) is a Maryland corporation
incorporated on May 9, 2002. All of PFGI Capital's Common Stock is owned
by The Provident Bank (the Bank). The principal business objective of
PFGI Capital is to acquire, hold, and manage commercial mortgage loan
assets and other authorized investments that will generate net income for
distribution to PFGI Capital's stockholders. As such, management views
its financial condition and results of operations as one business
segment. PFGI Capital has elected to be treated as a real estate
investment trust (REIT) for federal income tax purposes. As a REIT, PFGI
Capital generally is not liable for federal income tax to the extent that
it distributes its income to its stockholders and continues to meet a
number of other requirements.
The Bank, an Ohio state-chartered member bank of the Federal Reserve
System, is the main subsidiary of Provident Financial Group, Inc.
(Provident) and provides full-service retail and commercial banking
operations. PFGI Capital, the Bank and Provident's executive offices are
located at One East Fourth Street, Cincinnati, Ohio 45202, and its
Investors Relations telephone number is (513)345-7102 or (800)851-9521.
NOTE 2. BASIS OF PRESENTATION
- -----------------------------
The accompanying unaudited financial statements reflect all adjustments,
consisting of normal recurring accruals, which are, in the opinion of
management, necessary for a fair presentation of the financial position,
the results of operations, changes in shareholders' equity and cash flows
for the periods presented. These financial statements have been prepared
according to the rules and regulations of the Securities and Exchange
Commission and, therefore, certain information and footnote disclosures
normally included in financial statements prepared in accordance with
accounting principles generally accepted in the United States (GAAP) have
been omitted. The results of operations for interim periods are not
necessarily indicative of the results to be expected for the full year.
The preparation of financial statements in accordance with GAAP requires
management to make estimates and assumptions that affect amounts reported
in the financial statements. Actual results could differ from those
estimates.
The financial statements and notes thereto appearing in PFGI Capital's
2002 annual report on Form 10-K, which include descriptions of
significant accounting policies, should be read in conjunction with these
interim financial statements.
NOTE 3. LOAN PARTICIPATIONS AND RESERVE FOR LOAN PARTICIPATION LOSSES
- ---------------------------------------------------------------------
Participations in loans are generally purchased from the Bank at the
Bank's carrying value, which approximates fair value. Carrying value is
the principal amount outstanding plus accrued interest. A reserve for
loan participation losses is transferred from the Bank to PFGI Capital at
-7-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
the time participations are transferred. Loans sold back to the Bank are
accompanied by a transfer of the reserve for those loans from PFGI
Capital to the Bank. The reserve for loan participation losses reflects
management's judgment as to the level considered appropriate to absorb
inherent losses in the loan participation portfolio. PFGI Capital did not
have any nonperforming assets or impaired loans during the first quarter
of 2003.
The following table sets forth an analysis of the reserve for loan
participation losses for the period from January 1 to March 31, 2003 (in
thousands):
Balance at Beginning of Period $3,250
Transferred Reserves, Net (3)
Provision for Loan Losses -
Loans Charged Off -
Recoveries -
------
Balance at End of Period $3,247
======
NOTE 4. EARNINGS PER COMMON SHARE
- ---------------------------------
Basic earnings per common share is the amount of earnings for the period
available to each share of Common Stock outstanding during the reporting
period. Diluted earnings per common share is the amount of earnings
available to each share of Common Stock outstanding during the reporting
period adjusted for the potential issuance of common shares for stock
options, convertible debt, etc. The earnings available to each share of
Common Stock has been reduced by any Series A Preferred Stock dividend.
PFGI Capital has no stock options or convertible debt or other potential
equity instruments and therefore basic and diluted earnings per share are
calculated on the same basis. The Bank owns all of the issued and
outstanding Common Stock of PFGI Capital.
The following table sets forth the computation of basic and diluted
earnings per common share for the first quarter of 2003 (in thousands
except per share data):
Net Income $ 4,047
Less Preferred Stock Dividends (3,197)
-------
Income Available to Common Shareholder $ 850
=======
Weighted-Average Common Shares Outstanding 5,940
=======
Basic and Diluted Earnings Per Share $ 0.14
=======
-8-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 5. REGISTRATION AND ISSUANCE OF PRIDES
- -------------------------------------------
Provident and PFGI Capital registered 6,000,000 PRIDES pursuant to a
Registration Statement filed with the Securities Exchange Commission
which was declared effective on June 6, 2002. In addition, the managing
underwriter, Merrill Lynch & Co., was permitted to purchase up to an
additional 600,000 PRIDES to cover over-allotments. Provident and PFGI
Capital sold the 6,000,000 original PRIDES effective June 12, 2002 and
the 600,000 over-allotment PRIDES effective July 2, 2002. The offering
was subsequently terminated as all registered PRIDES had been sold.
Gross proceeds from the sale of PRIDES were $165 million. The
underwriting discount and expenses incurred from the issuance of the
PRIDES totaled $6,542,000 of which 85%, or $5,561,000, was allocated to
PFGI Capital. The remaining 15% was allocated to Provident as its share
of the PRIDES transaction.
PFGI Capital used all of the net proceeds it received from the sale of
the PRIDES for the purchase of participation interests in commercial
mortgage loans from the Bank. The Bank used the proceeds from the sale of
the participation interests for general corporate purposes, including
working capital and funding of asset growth.
NOTE 6. DESCRIPTION OF PRIDES
- -----------------------------
Each PRIDES has a stated amount of $25.00 per unit and is comprised of
two components - a 3-year forward purchase commitment (the Purchase
Contract) and PFGI Capital Series A Preferred Stock.
Each Purchase Contract obligates the holder to buy, on August 17, 2005,
for $25.00, a number of newly issued shares of Provident Common Stock
equal to the settlement rate. The settlement rate will be calculated as
follows:
o if the applicable market value of Provident Common Stock is equal to
or greater than $29.0598, the settlement rate will be .8603;
o if the applicable market value of Provident Common Stock is between
$29.0598 and $24.42, the settlement rate will be equal to the $25.00
stated amount divided by the applicable market value; and
o if the applicable market value is less than or equal to $24.42, the
settlement rate will be 1.0238.
"Applicable market value" is defined as the average of the closing price
per share of Provident Common Stock on each of the twenty consecutive
trading days ending on the fifth trading day immediately preceding August
17, 2005.
Under the Purchase Contract, Provident will also make quarterly contract
adjustment payments to the PRIDES holders at an annualized rate of 1.25%
of the stated amount ($0.3125 per share).
-9-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
Holders of PFGI Capital's Series A Preferred Stock are entitled to
one-tenth of one vote per share on all matters submitted to a vote of the
shareholders, voting as a single class with the holders of Common Stock.
The holders of Preferred Stock will be entitled to receive, if, when, and
as authorized and declared by the board of directors out of legally
available assets, non-cumulative cash dividends at the rate of 7.75% per
annum of the initial liquidation preference which is $25.00 per share
($1.9375 per share). Dividends on the Preferred Stock will be payable, if
authorized and declared, quarterly in arrears on February 17, May 17,
August 17 and November 17 of each year, or if any such day is not a
business day, on the next business day. The Preferred Stock will rank
senior to the Common Stock of PFGI Capital as to dividend rights and
rights upon liquidation, winding up or dissolution.
In connection with the settlement of the Purchase Contract, Provident has
engaged a remarketing agent to remarket the PFGI Capital Preferred Stock
on behalf of the holders, at which time the PFGI Preferred Stock will be
permanently detached from the Purchase Contract. Once the Purchase
Contract is settled, there will be two separate and distinct securities
outstanding: PFGI Capital Preferred Stock and Provident Common Stock. The
proceeds received from the remarketing will be used by the holders of
Preferred Stock to fulfill their commitment under the terms of the
Purchase Contract.
Upon a successful remarketing of shares of the PFGI Capital's Preferred
Stock, the applicable dividend rate on the shares of Preferred Stock that
have been purchased in the remarketing will be reset to the reset rate
described below. The dividend rate of shares of Preferred Stock that are
not remarketed will not be reset and will continue to be 7.75%.
The reset rate will be determined by the reset agent as the dividend rate
the Preferred Stock should bear for the Preferred Stock to have a market
value on the fifth business day immediately preceding August 17, 2005 of
100.5% of the aggregate liquidation preference of the Preferred Stock,
plus declared and unpaid dividends, if any.
Each share of PFGI Capital's Preferred Stock will be automatically
exchanged for one newly issued share of Bank Series A Preferred Stock
upon the occurrence of an exchange event. An exchange event occurs when:
o the Bank becomes less than "adequately capitalized" according to
regulations established by the Federal Reserve Board pursuant to the
Federal Deposit Insurance Corporation Investment Act or as determined
by the Ohio Division of Financial Institutions pursuant to the Ohio
Banking Code and regulations thereunder;
o the Bank is placed into conservatorship or receivership;
o the Federal Reserve Board, in its sole discretion, directs such
exchange in writing, and, even if Provident Bank is not less than
"adequately capitalized," the Federal Reserve Board or the Ohio
Division of Financial Institutions, as the case may be, anticipates
the Bank becoming less than "adequately capitalized" in the near term;
or
-10-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
o the Federal Reserve Board, in its sole discretion, or the Ohio
Division of Financial Institutions, in its sole discretion, directs
such exchange in writing in the event that the Bank has a Tier 1
risk-based capital ratio of less than 5.0%.
Additional information concerning the PFGI Capital's Series A Preferred
Stock may be found in its Registration Statement on Form S-3, as amended,
effective June 6, 2002.
NOTE 7. RELATED PARTY TRANSACTIONS
- ----------------------------------
PFGI Capital holds a 95% participation interest through a participation
agreement with the Bank in certain loans originated by the Bank and its
subsidiaries. Generally, the participation interests are in commercial
mortgage loans secured by real property that were either directly
underwritten by the Bank and its subsidiaries or acquired by the Bank.
PFGI Capital expects to continue to purchase such interests in the future
from the Bank under the terms of the participation agreement.
The participation agreement also provides for the Bank to service the
commercial mortgage loans underlying the participations held by PFGI
Capital in a manner substantially the same for similar work performed by
the Bank for transactions on its own behalf. The servicing fee that the
Bank charges is .125% per year of the average daily outstanding principal
balances of the commercial mortgage loans underlying the participation
interests. Loan servicing costs incurred by PFGI Capital totaled $101,000
for the first quarter of 2003.
A summary of loan participation activity between the Bank and PFGI
Capital for the first quarter of 2003 follows:
Principal Balance at January 1, 2003 $ 325,005
Subsequent Transfers of Loan Participations from Bank to PFGI Capital 4,626
Loan Participation Advances 4,828
Transfer of Loan Participations from PFGI Capital to the Bank (5,072)
Loan Participation Payments (4,643)
---------
Principal Balance at March 31, 2003 $ 324,744
=========
The day-to-day operations of PFGI Capital are managed pursuant to the
terms of a management agreement between the Bank and PFGI Capital. The
Bank, in its role as manager under the terms of the management agreement,
receives a management fee designed as a reimbursement for costs incurred
to manage PFGI Capital. The Bank is required to pay all expenses related
to the performance of its duties under the management agreement,
including any payment to its affiliates for managing PFGI Capital. The
management fee that the Bank charges is .10% per year of the average
daily outstanding principal balance of the commercial mortgage loans
underlying the participation interests. Management fees incurred by PFGI
Capital total $81,000 for the first quarter of 2003.
-11-
PFGI CAPITAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Bank owns 100% of the Common Stock of PFGI Capital. Accordingly, the
Bank will receive all common dividends paid, if any, by PFGI Capital.
As of March 31, 2003 and December 31, 2002, PFGI Capital had an
interest-bearing deposit account of $6,539,000 and $5,357,000,
respectively, at the Bank and a net receivable of $220,000 and $279,000,
respectively, from the Bank.
NOTE 8. LEGAL CONTINGENCIES
- ---------------------------
On May 3, 2003, a purported class action was filed in the U.S. District
Court for the Southern District of Ohio by shareholder Silverback Master
Ltd. against Provident, PFGI Capital, Provident's President, Robert L.
Hoverson, Provident's Chief Financial Officer, Christopher J. Carey, and
Allen L. Davis and John R. Farrenkopf, former officers of Provident, on
behalf of all purchasers of PRIDES in or traceable to a June 6, 2002
offering of those securities registered with the Securities and Exchange
Commission and extending to March 5, 2003. This action is based upon
circumstances involved in a restatement of earnings announced by
Provident on March 5, 2003. It alleges violations of securities laws by
the defendants in Provident's financial disclosures during the period
from March 30, 1998 through March 5, 2003 and in the June 2002 offering.
The suit seeks an unspecified amount of compensatory damages and/or
rescission of purchases of those securities.
-12-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
INTRODUCTION
PFGI Capital is a Maryland corporation that was incorporated on May 9,
2002. PFGI Capital's principal business objective is to acquire, hold,
and manage mortgage assets and other authorized investments that will
generate net income for distribution to its shareholders. Since
operations commenced in June 2002, PFGI Capital has been operating as a
REIT for federal income tax purposes.
PFGI Capital is a subsidiary of the Bank, which is owned by Provident.
All of PFGI Capital's day-to-day activities and the servicing of the
loans underlying its participation interests are administered by the
Bank.
The participation agreement between the Bank and PFGI Capital requires
the Bank to service PFGI Capital's loan portfolio in a manner
substantially the same as for similar work performed by the Bank for
transactions on its own behalf. The Bank collects and remits principal
and interests payments, maintains perfected collateral positions, and
submits and pursues insurance claims. The Bank also provides to PFGI
Capital accounting and reporting services as required. The Bank is
required to pay all expenses related to the performance of its duties
under the participation agreement.
FORWARD-LOOKING STATEMENTS
This Form 10-Q contains certain forward-looking statements that are
subject to numerous assumptions, risks or uncertainties. The Private
Securities Litigation Reform Act of 1995 provides a safe harbor for
forward-looking statements. Actual results could differ materially from
those contained in or implied by such forward-looking statements for a
variety of factors including: sharp and/or rapid changes in interest
rates; prepayments of loans with fixed interest rates, resulting in
reinvestment of the proceeds in loans with lower interest rates;
significant changes in the anticipated economic scenario which could
materially change anticipated credit quality trends; adverse economic and
other developments in states where loans are concentrated; the possible
exchange of Series A Preferred Stock for preferred shares of the Bank at
the direction of the Federal Reserve Board or the Ohio Division of
Financial Institutions if the Bank becomes undercapitalized; the failure
of PFGI Capital to maintain its status as a REIT for federal income tax
purposes; and significant changes in accounting, tax, or regulatory
practices or requirements and factors noted in connection with
forward-looking statements. Additionally, borrowers of loan
participations could suffer unanticipated losses without regard to
general economic conditions. The result of these and other factors could
cause differences from expectations in the level of defaults, changes in
risk characteristics of the loan participation portfolio, and changes in
the provision for loan participation losses. Forward-looking statements
speak only as of the date made. PFGI Capital undertakes no obligations to
update any forward-looking statements to reflect events or circumstances
arising after the date on which they are made.
-13-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
SUMMARY
PFGI Capital reported net income available to common shareholders of
$850,000, or $0.14 per common share, for the first quarter of 2003. Cash
dividends of $3,197,000, or $0.4844 per share, were paid to the Series A
Preferred shareholders during this time period. No dividends were paid to
the common shareholders during the first quarter of 2003.
At March 31, 2003 and December 31, 2002, PFGI Capital had total assets of
$329,373,000 and $328,515,000, respectively. These assets were primarily
comprised of net commercial mortgage loan participations totaling
$321,497,000 and $321,755,000 as of the same dates. These loan
participations were all acquired from the Bank. Equity for PFGI Capital
was $329,365,000 and $328,515,000 as of March 31, 2003 and December 31,
2002, respectively.
RESULTS OF OPERATIONS
Interest Income
PFGI Capital's primary source of revenue is interest income on its
commercial mortgage loan participations. A secondary source of interest
income is interest earned on a deposit account held at the Bank. PFGI
Capital has no interest-bearing liabilities and no related interest
expense. Total interest income was $4,255,000 for the quarter ended March
31, 2003. The yield on the loan participation portfolio as of March 31,
2003 was 5.20%.
Provision For Loan Participation Losses
The provision for loan participation losses is the charge to earnings
necessary to maintain the allowance for loan losses at a level adequate
to absorb management's estimate of inherent losses in the loan portfolio.
There was no provision for loan participation losses during the first
quarter of 2003 as all loan participations were transferred to PFGI
Capital with a reserve and there were no charge-offs.
Noninterest Income and Expense
PFGI Capital did not record any noninterest income during the first
quarter of 2003. Noninterest expense of $208,000 was recognized during
this time period. Noninterest expense is comprised primarily of
compensation paid to the Bank for loan servicing and management fees
which totaled $101,000 and $81,000, respectively. On an annual basis,
loan servicing fees are assessed at a rate of 0.125% of the average daily
outstanding principal balance of the loan participations and management
fees are assessed at a rate of 0.10% of the average daily outstanding
balance of loan participations.
-14-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Income Taxes
PFGI Capital has elected to be treated as a REIT for federal income tax
purposes and intends to maintain compliance with the provisions of the
Code and therefore is not subject to income taxes.
FINANCIAL CONDITION
Commercial Mortgage Loan Participations
As of March 31, 2003, PFGI Capital had $321,497,000 of commercial
mortgage loan participations net of reserves. The participation portfolio
was acquired from the Bank. In order to qualify as a REIT, at least 75%
of PFGI Capital's assets must consist of real estate assets.
The following table shows the geographic distribution of the loans
underlying the commercial mortgage loan participations as of March 31,
2003:
Aggregate Percentage
Principal by Aggregate
Number Balance Principal
State of Loans (In Thousands) Balance
- -----------------------------------------------------------------------
Ohio 155 $ 260,663 80.27%
Florida 11 16,992 5.23
Kentucky 9 9,583 2.95
All Others 15 37,506 11.55
--- --------- ------
Total 190 $ 324,744 100.00%
=== ========= ======
The following table shows the composition of the commercial mortgage loan
participations by property type at March 31, 2003:
Aggregate Percentage
Principal by Aggregate
Number Balance Principal
Property Type of Loans (In Thousands) Balance
- ----------------------------------------------------------------------------
Shopping / Retail 42 $ 98,164 30.23%
Office / Warehouse 57 91,067 28.04
Hotel / Motel 9 43,946 13.53
Apartments 35 42,511 13.09
Residential Development 13 13,938 4.29
Healthcare Facilities 2 7,154 2.21
Other Commercial Properties 32 27,964 8.61
--- --------- ------
Total 190 $ 324,744 100.00%
=== ========= ======
-15-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Some of the loans underlying the commercial mortgage loan participations
bear interest at fixed rates, and some bear interest at variable rates
based on indices such as LIBOR and the prime rate. The following tables
show data with respect to interest rates of the loans underlying the
commercial mortgage loan participations at March 31, 2003:
Fixed Rate Variable Rate
----------------------------------- ------------------------------------
Aggregate Percentage Aggregate Percentage
Number Principal by Aggregate Number Principal by Aggregate
of Balance Principal of Balance Principal
Interest Rate Loans (In Thousands) Balance Loans (In Thousands) Balance
------------------------------------------------------------------------------------------
Under 5.00% 3 $ 1,956 5.75% 84 $ 206,027 70.86%
5.00% to 5.99% 1 6,760 19.88 16 6,450 2.22
6.00% to 6.99% 2 809 2.38 23 30,091 10.35
7.00% to 7.99% 4 9,028 26.54 32 22,644 7.79
8.00% to 8.99% 5 15,456 45.45 20 25,523 8.78
-- -------- ------ --- --------- ------
15 $ 34,009 100.00% 175 $ 290,735 100.00%
== ======== ====== === ========= ======
Aggregate Percentage Weighted
Number Principal by Aggregate Average
of Balance Principal Interest
Interest Type Loans (In Thousands) Balance Rate
---------------------------------------------------------------------------
Fixed Rate Loans 15 $ 34,009 10.47% 7.16%
Variable Rate Loans 175 290,735 89.53 4.97
--- --------- ------ ----
Total 190 $ 324,744 100.00% 5.20%
=== ========= ====== ====
Other Assets
As of March 31, 2003 and December 31, 2002, PFGI Capital had cash of
$6,539,000 and $5,357,000, respectively, in an interest bearing deposit
account at the Bank. As of March 31, 2003, the account was yielding a
rate of 1.20%.
Additionally, PFGI Capital had interest receivable of $1,105,000 and
$1,107,000, accounts receivable of $220,000 and $279,000, and prepaid
expenses of $12,000 and $17,000 as of March 31, 2003 and December 31,
2002, respectively.
INTEREST RATE RISK MANAGEMENT
PFGI Capital's income consists primarily of interest income on
participation interests in commercial mortgage loans. PFGI Capital does
not intend to use any derivative products to manage its interest rate
risk. If there is a decline in market interest rates, PFGI Capital may
experience a reduction in interest income on its participation interests
and a corresponding decrease in funds available to be distributed to
shareholders. The reduction in interest income may result from downward
adjustments of the indices upon which the interest rates on loans are
based and from prepayments of loans with fixed interest rates, resulting
in reinvestment of the proceeds in lower-yielding participation
interests. Further information regarding market risk can be found under
Item 3 of this report.
-16-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
CREDIT QUALITY
PFGI Capital's exposure to credit risk is managed through its use of
consistent underwriting standards that emphasize "in-market" lending
while avoiding excessive property type and business activity
concentrations. The Bank's credit administration function employs
extensive risk management techniques to ensure that loans adhere to
corporate policy and problem loans are promptly identified. These
procedures provide executive management of the Bank and PFGI Capital with
the information necessary to implement policy adjustments where
necessary, and take corrective actions on a proactive basis. These
procedures also include evaluating the adequacy of the reserve for loan
participation losses, which includes an analysis of specific credits and
the application of relevant reserve factors that represent relative risk,
based on portfolio trends, current and historic loss experience, and
prevailing economic conditions, to specific portfolio segments.
Concentration of credit risk generally arises with respect to
participation interests when a number of underlying loans have borrowers
in the same geographical region or with similar property types.
Concentration of credit risk may increase the relative sensitivity of
performance to both positive and negative developments affecting a
particular region or property type. PFGI Capital's balance sheet exposure
to geographic concentrations directly affects the credit risk of the
underlying loans within the participation interests. Approximately 88% of
the loans underlying the participation interests are located in Ohio,
Florida and Kentucky. Consequently, the portfolio may experience a higher
default rate in the event of adverse economic, political, or business
developments or natural hazards in these states and may affect the
ability of borrowers to make payments of principal and interest on the
underlying loans. "Shopping / Retail" and "Office / Warehouse" property
types represent approximately 30% and 28% of the total loan participation
balance, respectively. As a result, the portfolio may also experience a
higher default rate in the event of adverse business developments related
to these property types. Borrowers obligated in loans underlying PFGI
Capital's participation interests, however, do not represent a particular
concentration of similar business activity.
-17-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table shows a progression of the reserve for loan
participation losses for the first quarter of 2003 (dollars in
thousands):
Balance at Beginning of Period $3,250
Transferred Reserves, Net (3)
Provision for Loan Losses -
Loans Charged Off -
Recoveries -
------
Balance at End of Period $3,247
======
Net Charge-Offs to Average Commercial
Mortgage Loan Participations 0.00%
======
Reserve for Loan Participation Losses to
Commercial Mortgage Loan Participations 1.00%
======
Non-performing assets consist of underlying loans that are no longer
accruing interest and property acquired through foreclosure. Commercial
mortgage loans are placed on non-accrual status and stop accruing
interest when collection of principal or interest is in doubt or
generally when the underlying loans are 90 days past due. When interest
accruals are suspended, accrued interest income is reversed with prior
period accruals charged to earnings. As of March 31, 2003, no loans had
been placed on non-accrual status nor had any property been acquired
through foreclosure. Additionally, no loan participations were delinquent
thirty or more days as of March 31, 2003.
LIQUIDITY AND CAPITAL RESOURCES
The objective of maintaining liquidity within PFGI Capital is to ensure
the availability of sufficient cash flows to meet all of PFGI Capital's
financial and dividend commitments. In managing liquidity, PFGI Capital
takes into account various legal limitations placed on a REIT.
PFGI Capital's principal liquidity needs are to maintain the loan
participation portfolio size through the acquisition of additional
commercial mortgages as loans currently in the portfolio mature, or
prepay, and to pay dividends to the holders of Preferred Stock and Common
Stock. The acquisition of additional commercial mortgage loan
participations is intended to be funded with the proceeds obtained from
the repayment of principal balances by individual borrowers. PFGI Capital
does not anticipate any material capital expenditures.
Holders of PFGI Capital's Preferred Stock are entitled to receive, if
authorized and declared by the board of directors, non-cumulative
dividends at the rate of 7.75% per annum, or $1.9375 per share. As
6,600,000 shares of Preferred Stock is outstanding, cash dividends of
$3,197,000 are expected to be paid each quarter.
-18-
PFGI CAPITAL CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
As an alternative to distributing a cash dividend to its common
shareholder, PFGI Capital has the option of distributing a dividend using
a procedure known as a "consent dividend", as authorized by Section 565
of the Internal Revenue Code. A consent dividend procedure is where a
shareholder, on the last day of a REIT's tax year, agrees to treat as a
dividend the amount that the REIT so designates, without any distribution
of cash or property actually occurring. The effect of the consent
dividend is that the REIT is considered to have paid a dividend on the
last day of its tax year, and the shareholder is treated as having
received that amount and contributed it back to the REIT. The dollar
amount of the consent dividend is included, as if it were distributed, in
the calculation to determine that at least 90% of a REIT's taxable income
has been distributed to its shareholders. PFGI Capital, as a REIT,
receives a deduction for dividends paid, reducing its taxable income by
the amount of the consent dividend, but without the need to have cash
available to distribute. PFGI Capital and its common shareholder have
agreed to use the consent dividend procedure. As a result, PFGI Capital
will have additional funds available for investment purposes and/or for
distribution to its preferred shareholders.
-19-
PFGI CAPITAL CORPORATION
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- -------------------------------------------------------------------
Management is concerned with the timing and magnitude of the repricing of
assets and liabilities. It is management's objective to attempt to
control risks associated with interest rate movements. Market risk is the
risk of loss from adverse changes in market prices and interest rates.
Market risk arises primarily from interest rate risk inherent in lending
and other related activities. Management actively monitors interest rate
risk exposure. Management reviews, among other things, the sensitivity of
assets and liabilities, as applicable, to interest rate changes, the book
and market values of assets and liabilities, unrealized gains and losses,
purchase and sale activity, maturities of investments and anticipated
loan participation pay-offs. PFGI Capital's interest-rate-sensitive
assets consisted largely of participation interests in commercial
mortgage loans. At March 31, 2003, 10% of PFGI Capital's loan
participation portfolio had fixed interest rates. Such loans tend to
increase interest rate risk. At March 31, 2003, PFGI Capital did not have
any interest-rate-sensitive liabilities.
As indicated earlier, PFGI Capital's income consists primarily of
interest income from participation interests. If there is a decline in
market interest rates resulting from downward adjustments in the indices
upon which the interest rates on loans are based, PFGI Capital may
experience a reduction in interest income and a corresponding decrease in
funds available for distribution to holders of Preferred Stock. A decline
in interest income can also be realized from prepayments, including
pay-offs, of loans with fixed interest rates, resulting in reinvestment
of proceeds in lower-yielding participation interests. The borrower has
the ability to prepay a loan with or without premium or penalty depending
on the provisions found in the underlying loan agreements. The level of
underlying loan prepayments is influenced by several factors, including
the interest rate environment, the real estate market in particular
geographic areas, the timing of transactions, and circumstances related
to individual borrowers and loans.
In order for PFGI Capital to have sufficient cash flows to meet projected
expenses and scheduled dividend payments to holders of Preferred Stock,
loan participations of PFGI Capital cannot yield lower than approximately
4.20%. As of March 31, 2003, the average weighted yield on loan
participations was 5.20%. Assuming that the investment in participation
interests remain level, yields on loan participations would have to
decrease by 100 basis points before cash flows would be insufficient to
cover the regular dividend payments to holders of Preferred Stock.
-20-
PFGI CAPITAL CORPORATION
ITEM 4. CONTROLS AND PROCEDURES
- --------------------------------
An evaluation was performed under the supervision and with the
participation of management, including the principal executive and
financial officers, of the effectiveness of the design and operation of
PFGI Capital's disclosure controls and procedures within 90 days prior to
the filing of this Form 10-Q. Based on that evaluation, management,
including the principal executive and financial officers, concluded that
PFGI Capital's disclosure controls and procedures were effective with no
significant weaknesses noted. There have been no significant changes in
PFGI Capital's internal controls or in other factors that could
significantly affect these internal controls after the date of their
evaluation.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
- -------------------------
On May 3, 2003, a purported class action was filed in the U.S. District
Court for the Southern District of Ohio by shareholder Silverback Master
Ltd. against Provident, PFGI Capital, Provident's President, Robert L.
Hoverson, Provident's Chief Financial Officer, Christopher J. Carey, and
Allen L. Davis and John R. Farrenkopf, former officers of Provident, on
behalf of all purchasers of PRIDES in or traceable to a June 6, 2002
offering of those securities registered with the Securities and Exchange
Commission and extending to March 5, 2003. This action is based upon
circumstances involved in a restatement of earnings announced by
Provident on March 5, 2003. It alleges violations of securities laws by
the defendants in Provident's financial disclosures during the period
from March 30, 1998 through March 5, 2003 and in the June 2002 offering.
The suit seeks an unspecified amount of compensatory damages and/or
rescission of purchases of those securities.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
- ----------------------------------------
(a) Exhibits filed:
Exhibit 99.1 - Section 906 of the Sarbanes-Oxley Act of 2002,
Certification of Chief Executive Officer
Exhibit 99.2 - Section 906 of the Sarbanes-Oxley Act of 2002,
Certification of Chief Financial Officer
All other items required in Part II of this form have been omitted since
they are not applicable or not required.
-21-
PFGI CAPITAL CORPORATION
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PFGI Capital Corporation
(Registrant)
Date: May 15, 2003 /s/Anthony M. Stollings
-----------------------
Anthony M. Stollings
Controller
(Principal Financial Officer)
-22-
PFGI CAPITAL CORPORATION
Certification of Principal Executive Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427
I, Christopher J. Carey, the principal executive officer of PFGI Capital
Corporation ("PFGI Capital"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of PFGI Capital;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/Christopher J. Carey
-----------------------
Christopher J. Carey
President (Principal Executive Officer)
-23-
PFGI CAPITAL CORPORATION
Certification of Principal Financial Officer
Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
and Securities and Exchange Commission Release 34-46427
I, Anthony M. Stollings, the principal financial officer of PFGI Capital
Corporation ("PFGI Capital"), certify that:
1. I have reviewed this quarterly report on Form 10-Q of PFGI Capital;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect to
the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented in
this quarterly report;
4. The registrant's other certifying officer and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) Designed such disclosure controls and procedures to ensure that
material information relating to the registrant, including its
consolidated subsidiaries, is made known to us by others within
those entities, particularly during the period in which this
quarterly report is being prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls
and procedures as of a date within 90 days prior to the filing date
of this quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on
our evaluation as of the Evaluation Date;
5. The registrant's other certifying officer and I have disclosed, based
on our most recent evaluation, to the registrant's auditors and the
audit committee of registrant's board of directors (or persons
performing the equivalent functions):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have
identified for the registrant's auditors any material weaknesses in
internal controls; and
b) Any fraud, whether or not material, that involves management or
other employees who have a significant role in the registrant's
internal controls; and
6. The registrant's other certifying officer and I have indicated in this
quarterly report whether or not there were significant changes in
internal controls or in other factors that could significantly affect
internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: May 15, 2003 /s/Anthony M. Stollings
-----------------------
Anthony M. Stollings
Controller (Principal Financial Officer)
-24-